The Lefkofsky interview: Detroit native talks about future of Groupon, new business possibilities

By Crain's Chicago Business

Bloomberg News

Eric Lefkofsky was born in Detroit, grew up in Southfield and graduated from the University of Michigan. He took over as CEO of Groupon last year.

Detroit nativeEric Lefkofskysat down with Crain's Chicago Business for an interview in Groupon Inc.'s headquarters after the Chicago-based online deals company reported year-end earnings on Feb. 20 that left investors cold.Lefkofsky was born in Detroit, grew up in Southfield and graduated from the University of Michigan. He and fellow UM grad Brad Keywell invested the first $1 million in Groupon. Here's what Lefkofsky had to say on where online deals company goes next, his plans to loosen the reins and why — for now at least — he's willing to disappoint Wall Street. Here's an edited transcript.

What's the biggest fix you had to make in the past year?

“The biggest thing I've tried to focus on is keeping everyone focused and really narrowing the number of projects we're trying to tackle.

“At times we're a misunderstood business. We're in the local business but we're in categories that are very strong — Groupon Goods and Getaways and Live. You have people that are constantly saying, 'I like North America; I don't like international. I like Local; I don't like this Goods stuff.' You have a lot of that.

“We say to people all the time: 'You're viewing this from the wrong lens.' Mobile commerce resets the landscape. Ultimately the question is: When people open up their phone and they want to buy something, where do they start? Because Groupon has such a strong hold in local commerce, we believe we can create a compelling proposition for them to check Groupon first."

What makes you think that's possible?

“Typically it's hard for an e-commerce company that's offering one thing to extend its value proposition to another thing. 'I use Expedia to buy hotels, and I don't buy toaster ovens from you.' When we were starting to see our categories explode, we would put something in front of our customers, and they would flock to it. That's when we knew the Groupon brand was bigger than we thought — not just restaurants and spas — great value on anything.

“When mobile began to skyrocket, that's when the lightbulb went off for me. This company has the chance to be one of the truly great Internet businesses of the world and maybe the great mobile-commerce company of the next decade. When you think about 50 percent of our worldwide business coming from mobile, it's staggering when you think about the fact that we're in many countries where smartphone adoption is like 15 or 20 percent. You had a value proposition across many categories, and our customers were flocking to us in mobile.”

What's going to be the earliest tangible sign that that's working?

“We think you're going to start to see some of things we're seeing, which is, you're going to see the amount that people do through our own search box go up. Last quarter, it was 6 percent of our business. This quarter it's 8 percent. Ultimately what you're looking for is a fundamental shift in behavior. It's happening. We just need more of them.”

What do people not understand about Groupon?

“If there's anything that causes confusion, they don't understand how all these pieces connect. You get people who think local is restaurants and spas from mom and pops. It's not even national deals. That definition is very narrow. Local is everything you can consume around you that is easy to get to. That's a big misconception. So when we launch new categories, there's always some consternation that we're being not disciplined enough.

“For example, we launched Freebies, offering coupons people can buy and redeem. Yes, when you launch these categories they often have a non-local component. For example, when you load up a coupon, that coupon can be redeemed online. That's not local.

“Just like when you launch goods. I can ship it to your house. That's not local. Over time, these categories will all become local in their orientation. Even our Freebies business will eventually have in-store coupons that can be redeemed and all this intelligence about this J.C. Penney store is offering this discount, that store is offering another discount — that's when it's really powerful."

When will you feel like people get it?

“I don't know at what point Priceline said to itself, 'Now people get it,' or Amazon, said, 'People get it.' My assumption is it took time, and there were a lot of years when I'm sure people were saying to Jeff Bezos, 'Why are you not focused on books? Why are you offering consumer electronics? You're not good at that. Why don't you let Best Buy do that and you stay focused on books?'

“But you have a broader vision. When you have such a broad opportunity as we have — and I think we have an opportunity to be an important player in mobile commerce globally. When you have that kind of opportunity, you just can't be too dissuaded by people getting it or not getting it. You have to stay very focused on the long term and what you're building.

“The knock on us for the last year has been: you guys are generating some pretty good EBITDA for an e-commerce company. That's really strong, but you're not growing as fast as I'd like you to. Our billings grew almost 10 percent last year so people are saying, 'If this opportunity is as big as I think it is, why aren't you growing faster?' And we've got a lot of moving pieces and parts. So 2014 is all about reinvigorating growth.

“When you're growing revenue at north of 20 percent a year, and you can sustain that for multiple years, eventually the EBITDA picture gets great because there is ultimate leverage in these businesses. We could generate an extra hundred million of EBITDA in a heartbeat by reducing our investments in technology and reducing our investments in marketing. We just have that leverage.

“The hard part is how do you set the company up to grow year after year at 20, 25, 30 percent? That's the magic. That's what we're focused on in 2014. If we can deliver that, we'll have the product consumers want and the growth we want, and we'll be happy."

What example do you give to people of why Groupon can work as a platform vs. just as a deal?

“One of the reason we bought Ideeli, for example, is we put up some Hermes bags that I think ranged from $3,000 to $12,000, and we sold all the bags. It was no small amount. You say to yourself, 'Wow.' We've always known our customers are affluent and young, they're really vibrant. we offer a lot of deals — to see people spending that kind of money is unique. On Groupon Goods we'll put up batteries and sell thousands of packages of batteries, and you realize our customers are willing to rely on us for everyday items. You put them up and they fly."

What new businesses are you thinking about entering?

“We're always testing new categories, and I'd expect us to get into new categories over time, whether that's in the next few months or year. We're by no means done with category expansion. I would expect us to launch one or two categories at some point in the near future."

What aren't you going to do?

“If it can have a local component, then it's on our radar. A category we're not going into anytime in the near future — I think about automobile deals. It's a category we're not going into so we can have a conversation about it. If you look at the Yellow Pages, automobiles probably represents a big number. So when you think about local, it's got very broad horizons. We tend to let our customers tell us what categories we should go into."

What keeps you up at night?

“We did $5.8 billion in billings last year. At that size you don't have the same things that keep you up at night as when you're small and fragile. You tend to be more focused on the opportunity.

“The opportunity here to build the next great Internet company, and maybe the greatest mobile-commerce company is unbelievable. That's the story we hope to write for Chicago — to be able to build that here, would be a great accomplishment. I don't think people even in Chicago realize the investments we're making.

“When I tell people we have 1,400 people in product and engineering, they say, 'I'd never have thought that.' They say, 'I don't think of you as a tech company.' And we say, 'Oh, my God.' The technology we have here is tremendous, both from merchant side to the consumer side. We're doing things that are tremendous in algorithmically picking deals for people. All the tools we've built to allow us to operate at this scale, some of the most interesting technology problems in mobile commerce are likely to be solved by companies like us.

“Ultimately because Groupon has such a stronghold in local commerce, we have so many customers and credit cards on file — we have 46 million customers. We're in a position to be one of the companies that really changes how you buy locally.

"You can imagine walking into a store. You have your Groupon account and you're paying for your bill and getting a discount to the extent they're offering one, without ever pulling your phone out of your pocket. The transaction gets triggered because you're a Groupon customer — either at the register or a device attached to the register where basically the merchant knows you're a Groupon customer and we have your credit card on file. We're already in a payment relationship with the merchant. Those are all the kinds of things we can enable by virtue of the fact we have this platform. We have merchants connected; we have customers connected. We can facilitate commerce in ways people don't think about."

Are you still thinking you'll spend a couple years in this gig?

“Right now, instead of seeing a horizon of time, I see a horizon of to-dos. At a moment in time when I feel I've built all the building blocks I can build, and it becomes much more where the executive functions outweigh the entrepreneurial functions, then that'll probably be my time."

Give me an example of some of the things on your plate.

“We're building a marketplace. To build a marketplace, you need to build supply and demand. We've done a tremendous amount of work to get supply. We now have 140,000 deals in the market. When we went public, we had 1,000.

"But we still don't have enough demand — we don't have enough consumers who think 'I'm going to check Groupon first when I'm out and about.' If you were to check with a hundred consumers tomorrow, and say, 'What does Groupon mean to you?' Far too many of them say, 'Oh, it's the daily-deal company; they send me an e-mail every day.' Even though we've had massive mobile adoption, they don't think about us as a real-time marketplace where they can type in pizza or pilates or yoga and get amazing deals. It takes time to build that awareness. It's one of the initiatives I'm trying to drive this year."

What were things like a year ago?

“They were hectic. when Ted Leonsis and I came in in February, it was a difficult time: The stock had had a really rough year. Andrew Mason had just left. People were doing a lot of initiatives, so they were scattered doing a ton of stuff. We had to try and get people focused. The good news is the team is strong. We have 50 vice presidents around the world, and it's been an amazingly stable group. That team helped shore things up very quickly. I'd like to take all the credit for it, but you have an amazing team at Groupon.

You've had a couple people leave recently, such as Jeff Holden, who had been senior vice president for product management, and Brian Schipper, who went from running Groupon's HR department to Twitter.

“I think that when you have this many vice presidents, you're going to have some amount of people come and go over time. Like I said, we've been fortunate the team has been remarkably stable. We have talent we can bring up the ranks and we've brought on people from Amazon, Orbitz and Wal-Mart.

“2013 was all about building this foundation, getting to the point business was stable. 2014 is all about growth. Part of doing that is you have to do a bit of reorganization to make sure that people have some autonomy because when you're trying to stabilize the business, you kind of bring everything in; you focus on controlling everything you can to make sure it's stable. Now that things are stable, you focus on giving people some more autonomy and making sure people have freedom to move fast."

It looks like the early decisions— to push the land grab and go for market share, even going public and getting out while you could get out — look like the right calls. Do you think maybe folks are coming around to that?

“At that moment, it was a land grab. The decisions we made to go international and to invest heavily in marketing were the right decisions. LivingSocial made the same decision. There were many months they were out-investing us, and they had access to a ton of capital. We were both investing heavily in trying to capture market share.

“What ultimately separates us isn't the investments we made, but by virtue of size and scale, and it wasn't even the public money. We early on began building a significant technology bend to our business. We began innovating very early on. We began building smart deals and Deal Bank that made our emails more relevant. Then we migrated toward mobile, then we built a marketplace so people could come to our site and buy deals when they needed them instead of buying them far in advance.

"A lot of those innovations made it hard to compete against us. If you're a merchant and Groupon knocks on your door, you're like, 'Well they've got over 200 million subscribers, over 70 million app downloads; they have this huge customer base that's engaged. And on top of that they have this technology that's going to bring me as many customers as I want at the times that I want them. So why do I feel compelled to work with other people?'

“Before we went public, the big knock on Groupon was there are no barriers to entry, and here we are three years later, and Google Offers is all but out of the space, Facebook Deals is all but out of the space, and Amazon Local is still very, very small; and we're gaining market share.

“What people didn't realize is the barrier to entry is on the merchant side. They don't want to work with 10 companies. They say, 'If Groupon's bringing me what I need in this category, then I'm done.' It's very similar to what other people have seen: If I get what I need from Facebook, I don't feel compelled to go to Google Plus. If I get what I need from Google search, I don't feel compelled to go to Bing.

“We've seen some of that same effect work in our favor. The merchant cares about you bringing the right customers at the right time."

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If you enjoy the content on the Crain's Detroit Business Web site and want to see more, try 8 issues of our print edition risk-free. If you wish to continue, you will receive 44 more issues (for a total of 52 in all), including the annual Book of Lists for just $59. That's over 55% off the cover price. If you decide Crain's is not for you, just write "Cancel" on the invoice, return it and owe nothing. The 8 issues are yours to keep with no further obligation to us. Sign up below.